Barristers have been offered a £10m pay rise to settle an acrimonious dispute with ministers that threatens to bring chaos to the courts.

The move follows barristers' refusal to represent clients in legal aid cases where they believe they are being underpaid.

The Secretary of State for Constitutional Affairs, Lord Falconer, has written to the Bar setting out terms for a settlement including an inflation-busting 8 per cent increase in legal aid rates for barristers who practise family law. The deal could be worth as much as £10m over two years.

But in what may be viewed as an attempt by ministers to divide and rule, there is no new money for criminal barristers. They are already angry over new rates of pay imposed for the biggest criminal cases, which came into force at the beginning of the month. Many senior lawyers regard the new funding regime as a pay cut and have started turning away criminal defendants.

Ministers insist that QCs and juniors make a healthy living out of legal aid, with some earning as much as £240,000 a year.

The Bar Council, which represents 14,000 barristers in England and Wales, argues that this does not take account of the fact that barristers are self-employed and have to pay overheads, including hefty rental on chambers and pension contributions.

Two years ago, family barristers decided they would no longer take publicly funded work which was not paid at a rate they thought reasonable. Just before Christmas the criminal Bar followed suit.

Barristers have threatened legal action against ministers over the new pay system for publicly funded cases. The changes, under the graduated fee scheme and the new rates for higher-cost criminal cases, were brought in to reduce the now record annual legal aid bill of £2bn. Criminal legal aid is running at £1bn and family legal aid at £456,000.

Under the new deal family barristers will get a staggered 8 per cent increase - 4 per cent in the first year and 4 per cent more on condition that there are equivalent efficiency savings elsewhere in the system.

But in his letter to the Bar Council Lord Falconer says there is no new money for criminal barristers, only a promise to review the present system with a proposal to take all trials lasting under 40 days out of the high-cost criminal cases pay regime.

Overall the deal is unlikely to satisfy the leaders of both the criminal and family Bar.

Guy Mansfield QC, vice-chairman of the Bar, said: "Any increase is better than none but this represents a failure to make good a cut that was never intended, after the department got its figures wrong in the first place ... This is a very serious matter affecting a socially important area of the law concerning families and children, whom this Government says it's concerned about."

The Department for Constitutional Affairs said that negotiations with the Bar were ongoing.